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It looks like McKesson Corporation (NYSE:MCK) is about to go ex-dividend in the next 4 days. You can purchase shares before the 31st of August in order to receive the dividend, which the company will pay on the 1st of October.
McKesson's next dividend payment will be US$0.42 per share. Last year, in total, the company distributed US$1.68 to shareholders. Based on the last year's worth of payments, McKesson has a trailing yield of 1.1% on the current stock price of $152. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately McKesson's payout ratio is modest, at just 31% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 10% of its free cash flow in the last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see McKesson's earnings per share have dropped 7.1% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. McKesson has delivered an average of 13% per year annual increase in its dividend, based on the past 10 years of dividend payments.
To Sum It Up
From a dividend perspective, should investors buy or avoid McKesson? McKesson has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. In summary, while it has some positive characteristics, we're not inclined to race out and buy McKesson today.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example, we've found 3 warning signs for McKesson that we recommend you consider before investing in the business.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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